Study points to high cost of loans paid by black, Latino home buyers

A disproportionate number of the state's African-American and Latino home buyers receive high-cost mortgage loans from subprime lenders, according to a study released yesterday by a national antipoverty organization.

The study, issued by the Association of Community Organizations for Reform Now, found 22.8 percent of black homeowners in the Boston metropolitan area received subprime refinance loans in 2002 -- a rate five times greater than whites -- up from 19.9 percent in 2001.

For Latino home buyers the figure was 16.5 percent -- a rate six times greater than whites -- up from 13.8 percent in 2001. White homeowners received 4.9 percent of subprime loans in 2002, or one out of 20 loans.

"While some steps have been taken to end abuses in the mortgage lending industry, our study demonstrates that not enough has been done to curb these practices, said ACORN president Maude Hurd, a Dorchester resident.

"Predatory loans steal families' homes and force others to choose between paying their mortgage or meeting other basic needs."

The study found the greatest number of high-cost refinancing loans were made to minorities in the Brockton metropolitan area, which includes Bristol, Norfolk, and Plymouth counties.

Among African-Americans there, 31.9 percent of loans were subprime, up from 24.3 percent in 2001. Nearly 25 percent of subprime loans went to Latinos in 2002, an increase from 20.1 percent in 2001. In contrast, 8.6 percent of such loans went to whites.

The US Department of Housing and Urban Development defines a predatory or subprime loan as one made with no regard for the borrower's ability to repay. Households with poor credit histories are typically offered these loans, which include prepayment penalties and high interest rates and fees.

Subprime lenders say they must charge higher rates for these borrowers to cover the underwriting risks. These companies say when they didn't lend in minority neighborhoods, they were criticized.

Kevin Cuff, spokesman for the Massachusetts Mortgage Bankers Association, declined to comment on the ACORN study.

Consumer advocates say in addition to higher rates, subprime lenders charge points and fees well in excess of standard closing costs, often including hidden charges, balloon payments, and prepayment penalties.

ACORN's report focuses on refinancing because a disproportionate number of minorities are more likely to receive such loans from predatory lenders. The report analyzed federal data on the lending activities of more than 7,000 lenders nationwide, including 383 in Massachusetts, for loans issued in 2002 that were covered by the Home Mortgage Disclosure Act.

A proposal before the Legislature would cap the interest rate charged on high-cost loans for first mortgages to no more than 5 percentage points above the 30-year Treasury rate, which was 5.18 percent yesterday. For second mortgages, the cap would be 7 percentage points above the 30-year Treasury rate.

The bill, introduced by ACORN and cosponsored by Senator Andrea F. Nuciforo Jr., a Pittsfield Democrat and Senate chairman of the Joint Committee on Banks and Banking, would also limit points and fees at 4 percent of the total loan amount, or $400 per $100,000. Prepayment penalties for the first three years would be prohibited, and balloon payments would be outlawed.

The bill is opposed by subprime lenders who say such a law would make it more difficult to provide loans to people who lack good credit. Those whom the bill purports to help will be unable to buy homes or refinance loans, they argue.

Massachusetts does not cap interest rates or points. But lenders who charge more than 8 percentage points above the 10-year Treasury rate must tell applicants the loan "is not necessarily the least expensive" and advise them to shop around.

Consumers with poor credit expect to pay higher rates to cover the risk of default. But housing advocates insist that predatory lenders target vulnerable borrowers who have no way of repaying double-digit interest rates and excessive points.

Secretary of State William F. Galvin, who supports the measure, says approval of the legislation would make a huge difference.

"These lenders target homeowners with credit problems and pack on high interest rates, fees, significant prepayment penalties, and unneeded credit insurance," he said. "The only way to prohibit these high-cost loans and fees is to legislate caps.

A study to be released today by Harvard University's Joint Center for Housing Studies found that unequal access to home loans persists despite a rapidly changing marketplace.

"New technologies have spawned a revolution in mortgage finance that has enabled millions of low-income borrowers to obtain home mortgages on favorable terms," said center director Nicolas P. Retsinas. "But telemarketing by brokers of these high-cost mortgages has left some unsuspecting borrowers with debt they cannot afford."